MEDIA: HK’s TVB Pins Future Hopes On Shanghai Media Gang

Bottom line: TVB’s choice of a Shanghai-based traditional broadcaster as its mainland partner looks like a bad selection to ensure its future, as such traditional media rapidly get overtaken by more nimble Internet-based players.

TVB places bets on Shanghai Gang

Hong Kong has been buzzing this past week over the latest mainland encroachment on its media sector, which is seeing leading broadcaster TVB (HKEx: 511) sell a stake in itself to a Chinese investor. But few have gone past the headlines to see what’s really behind this deal, and whether it can help to ensure the longer term survival of a company that has long dominated Hong Kong’s broadcasting scene. In a nutshell, TVB is placing its bets on a group of Chinese media high-flyers that I like to call the “Shanghai Gang”, because they are rooted in China’s largest media market and have strong ties to the city’s monopoly broadcaster, Shanghai Media Group (SMG).

As a longtime resident of both Shanghai and Hong Kong, I can say with a certain degree of confidence that SMG is one of China’s most entrepreneurial traditional broadcasters. That means it’s unlikely to turn TVB into a propaganda machine like CCTV, the mainland’s only national broadcaster that is often called a mouthpiece of the Communist Party. At the same time, however, I’m not sure I would pick SMG as my mainland media partner, even though a number of other major multinationals have done so.

TVB has long been looking for a way to enter the mainland, where there’s a generally strong taste for Hong Kong movies and TV shows that are generally more commercial than their Chinese rivals. That drive has gained urgency in the last few years, as traditional broadcasters throughout the world rapidly lose ground to a savvier and fast-growing generation of new media companies like YouTube in the US, and China’s own LeTV (Shenzhen: 3000104) and Youku Tudou (NYSE: YOKU), which provide similar movies and other programs over the Internet.

TVB finally took the mainland plunge last week, when its controlling stakeholder Young Lion Holdings said it would sell an undisclosed stake in TVB to a fund connected to China Media Capital (CMC). CMC counts SMG among its major investors and is led by Li Ruigang, himself a  former head of SMG who still has close ties to his old employer and is considered one of the leading players in Shanghai’s media scene.

The deal immediately caused an uproar in Hong Kong, where alarmists cautioned the partnership could infect the city’s western-style open media with China’s more highly censored approach to broadcasting. (English article) But those alarmists might want to have a look at CMC’s actual lineage, which includes a wide range of partnerships with major and highly respected western media firms.

That list of partners runs the range from Hollywood giants DreamWorks Animation (NYSE: DWA) and Time Warner (NYSE; TWX), to British advertising major WPP (London: WPP) and Japan’s Softbank. The fund also has ties to Rupert Murdoch through its 2010 purchase of a controlling stake in New Corp’s (Nasdaq: NWSA) China-based TV station.

Those kind of credentials don’t really paint CMC and Li Ruigang’s Shanghai Gang as a group of media hacks who will turn TVB into a Communist Party propaganda machine. Rather than worry about that possibility, I would instead caution that this Shanghai group isn’t really all that entrepreneurial despite their ability to woo the big western names. The group certainly has some commercial sense, though its state-granted monopoly on the Shanghai TV market gives the company a huge advantages that no western peer would ever enjoy.

Those advantages, combined with CMC’s strong government connections, are almost certainly what tempted the big western media names, and also what is now drawing in TVB. But I would argue TVB could have found a better partner in a private Chinese company like LeTV, Youku Tudou or Baidu’s (Nasdaq: BIDU) iQiyi, which have much stronger commercial sense and better distribution systems with national reach. Instead it has decided to go with a more traditional media partner similar to itself, even as such traditional players rapidly get overtaken by the newer generation of companies that deliver their products over the Internet and cellphones.

Only time will tell if TVB can parlay its new Shanghai ties into a lifeline to maintain its relevance, as the new generation of Internet-based players rapidly blurs the lines between Hong Kong and the mainland for mainstream entertainment products. I would offer my own view that this latest partnership may not be the best tonic to save TVB, and that it should look for a faster-moving new media partner in China to ensure its future.

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